Transfer (Risk Strategy)
Transfer is a threat response strategy that shifts the negative impact and ownership of a threat to a third party. The risk is not eliminated but the responsibility for managing it moves to another entity.
Explanation
Risk transfer is most effective for financial risks and involves tools such as insurance policies, performance bonds, warranties, guarantees, and fixed-price contracts. By transferring risk, the project team delegates the management of the threat to a party better equipped to handle it.
For example, purchasing insurance transfers the financial impact of property damage or liability to the insurer. Signing a fixed-price contract with a vendor transfers the cost overrun risk to the vendor, who must deliver within the agreed price regardless of their actual costs. Using a warranty transfers the risk of defective materials to the supplier.
It is important to understand that risk transfer does not eliminate the risk—it simply moves the burden. The third party typically charges a premium (insurance premium, higher contract price) for accepting the risk. The total cost of transfer (premium + deductible or contract markup) must be weighed against the risk exposure to ensure it is cost-effective.
Key Points
- •Shifts risk ownership and impact to a third party
- •Common tools: insurance, bonds, warranties, fixed-price contracts
- •Most effective for financial risks
- •Does not eliminate the risk; a premium is typically paid for the transfer
Exam Tip
A fixed-price contract transfers cost risk to the seller. A cost-reimbursable contract keeps cost risk with the buyer. Know which contract type transfers risk to which party.
Frequently Asked Questions
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Part of
Risk Management
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